Period

2Q16/1H16 Actual vs. Expectation

Sime Darby (SIME)'s 1H16 core net profit* (CNP) of RM635m missed consensus (RM2.05b) and our forecast (RM1.97b) at 31% and 32%, respectively.

Plantation earnings disappointed on weaker CPO prices (-4% YoYto RM2,082/metric ton (MT)) as the Indonesian CPO levy weakened prices in the country. This was compounded by seasonally soft production in 2Q16 (-7% QoQ to 2.61m MT).

Dividends

Interim dividend of 6.0 sen was announced, making up 29% of our original 21.0 sen forecast. This is in line with historical dividend trend of higher DPS in 4Q.

Post-earning downgrade, we expect FY16E DPS of 17.0 sen. Key

Results Highlights

YoY, 1H16 CNP fell 37% on Industrial EBIT dropping 60% as its Australasia-side made losses (RM2.1m) due to poor coal prices and recognition of provisions and impairments totalling RM41m. Plantation EBIT weakened 21% due to lower CPO prices received, as mentioned above, while Property EBIT declined 19% on lower one-off disposal gains (against 1H15’s RM55m gain on E&O). Energy & Utilities (E&U) earnings were softer (-47%) due to lower throughput in China and unrealised forex loss of RM15m on its ONGC project.

QoQ, 2Q15 CNP declined 10% on disappointing Plantation EBIT (-52%) due to lower CPO prices (-1% to RM2,076/metric ton (MT)) and seasonally lower FFB production (-7% to 2.61m MT). Property EBIT also weakened 17% on lower unit sales. However, Industrials EBIT picked up 26% to RM68m post cost-cutting measures while Motors EBIT jumped 71% due to new model launches. E&U EBIT also improved to RM42m due to lower forex provisions and better port throughput at Weifang.

Outlook

Plantation performance should improve in 3Q16 on a pick-up in CPO prices (quarter-to-date 2Q16: RM2,332/MT or +9.6% vs 1Q16), although this may be offset by a softer postdrought production outlook. We lower our FY16-17E group FFB growth expectation to 4-4% from 10% to -1%.

Meanwhile, headwinds are likely to persist in other segments. (Further details overleaf.)

Change to Forecasts

FY16-17E CNP lowered 19-9% to RM1.60-2.08b as we reduce FFB growth outlook and new property sales assumptions, as discussed in our Outlook.

Rating

Downgrade to UNDERPERFORM (from MARKET PERFORM)

Valuation

We lower our TP to RM7.15 (from RM7.80) after taking into account the net negative impact of: (i) lower FFB production prospects and lower Property sales, and (ii) in light of rising CPO price trends, we up our Plantation segment PER to 24.0x (from 22.0x), in line with other large-cap planters’ Target PER. Following the earnings disappointments for 4 of the last 5 quarters, we downgrade our call to UNDERPERFORM (from MARKET PERFORM). Better Plantation prospect is overshadowed by soft Property, Motors and Industrial outlook.

Risks to Our Call

Higher-than-expected CPO prices.

Higher-than-expected earnings from non-plantation divisions.

Source: Kenanga Research - 25 Feb 2016